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Tapping Latin America’s Lithium

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Latin America’s abundant lithium reserves are highly attractive for investors, particularly from China.


BY MARTA COLOMAR-GARCIA
AND XINGJIAN ZHAO

 

Spanish Conquistadors once roamed Latin America’s lush jungles, mountains, and plains in search of the mythical Seven Cities of Gold.  In today’s Latin America, where economic realities transcend irrational exuberance, lithium compounds in dry salt lakes have replaced romantic visions of golden cities as a new and more feasible object of desire.  As the world inexorably moves away from fossil fuels and toward battery-powered alternative energy, demand for lithium is soaring.  Lithium-ion batteries, for example, are key to making pure electric cars more practical by reducing the volume of battery packs needed to power them, as well as making gasoline-electric hybrid cars more cost-competitive. 

However, there are important strategies and precautions that all foreign investors should observe when deciding to invest in
Latin America’s lithium resources.

China and other nations that manufacture and export consumer electronics, hybrid vehicles, and electric cars are casting their eyes on Latin America, where over 70 percent of the world's salt lake lithium deposits are found. 

In fact, in the past three to four years, many multinational companies have taken advantage of
China’s low labor costs and favorable government incentives by bringing advanced battery technologies to the country and establishing partnerships and joint ventures to manufacture lithium-ion batteries.  Even Warren Buffett has joined this fray, surprising speculators by making a $230 million investment to acquire a 10% stake in a little-known Chinese lithium battery production company called BYD.  Today, BYD is the world’s second-largest cell phone Lithium-ion battery manufacturer.  While China does have untapped lithium sources, it must import its lithium because its reserves are insufficient to cope with heightening demand.  With demand for lithium – specifically lithium carbonate – increasing exponentially in the past ten years, lithium exploration, and consequently, exports from Latin America is booming.

Today, most of the world’s lithium comes from dry salt lakes in Latin America (called “salares”), because these deposits are more economically viable for making lithium-ion batteries.  Although much of Latin America’s lithium reserves are located in Chile and Argentina (with Bolivia purporting to have the largest untapped reserves), Mexico is quickly becoming a new power player in this vast, expanding market.  In late 2009, for example, a Mexican mining firm found abundant deposits of lithium and potash in an area across the central states of Zacatecas and San Luis Potosí.  Averaging 830 grams of lithium per ton of earth, the production potential of this site alone is projected to be double that of the entire United States.  Unlike its Latin American counterparts, however, Mexico does not yet have a highly developed mining, transport, and processing infrastructure to facilitate large-scale lithium extraction.

At the very earliest stage, potential investors must take into account Latin America’s complex – and often foreboding – political climate.  According to the U.S. Geological Survey, Bolivia contains almost half of the world’s lithium reserves.  However, no lithium production takes place in that country because few foreigners can cope with Bolivia’s tempestuous political environment and its government’s hostility towards outside investors.  In contrast, Mexico has become an ideal place for potentially low-cost, wide-scale lithium extraction, as well as production of highly demanded lithium-based products such as the lithium-ion battery.

Mexico currently has tariff-free trade agreements with 25 countries, a very low cost of labor, and low taxes for foreign enterprises that make substantial investments into its economy.  As the premier destination for Chinese multinationals, there are currently 109 Chinese-based development plans pending in Mexico.  Moreover, since Mexico is a party to NAFTA, the channels of distribution to the rest of the Americas are wide open and come at relatively little cost compared to shipping finished products across the Pacific from China.  Its close proximity to the United States – whose economy is driven by rampant consumerism and insatiable appetites for new gadgets – also makes Mexico an ideal frontline for exporting lithium-based products to the world’s largest market.  No doubt the expansion of the Panama Canal, scheduled to be completed in 2014, will further fuel the demand for this commodity.

Once potential investors choose a specific region to direct their investment, attention should be paid to the ownership rights of the salt lake deposits themselves.  Perhaps the quickest and least expensive method of securing foreign lithium is to acquire the salt lakes directly from their Latin American owners, but many such salares are in remote locales and therefore not easily accessible.  Foreign investors may therefore prefer to work with multinational mining companies that have already acquired ownership of large quantities of these salt lakes.  It is also important to determine whether investors will be acquiring the entire ownership interest or merely entering into a joint venture with the local owners.  Although exclusive ownership carries its own benefits in the form of absolute control and maximized profit, it may be more practical to enter into a joint venture with local owners in order to capitalize on their abundance of experience, support, and existing infrastructure.  In either case, several critical factors need to be taken into consideration before making the investment.

A joint venture, if entered into with caution and care, can ensure long-term stability in operations and revenue after the initial investment is made.  Additionally, by engaging in a joint venture with a local owner, international investors may be able to shift some of the risks to their local partners.  For example, investors may develop a production-based payment method with these local partners, mitigating the risk of a bust.  This type of structure is especially beneficial when the salt lake is yet to be explored and its reserve remains unproven.  Joint ventures can be wildly successful, or potentially disastrous.  What makes the key difference?  Successful joint ventures, especially those between Chinese and Latin American investors, are able to overcome the challenges posed by the partners’ unique cultural backgrounds and management styles.  Also, successful joint ventures are built upon unambiguous management structures.  There should be no doubt as to who has the right to delegate resources, make investment decisions, and control the venture’s cash flow.

Successful joint ventures will also have realistic objectives and revenue projections.  The partners’ expectations will be properly managed with an organized corporate structure and an effective monitoring and feedback system.  Through a system of managerial checks and balances and well-designed review mechanisms, promises will be kept, and performance benchmarks will be consistent with the venture’s capacity, skill, and resources.  Communication and transparency are also key elements, as the partners must be open, fair, and frank with each other.  One example of a potentially successful lithium project is the joint venture between Japan’s Toyota Group and the Argentina-based Orocobre Limited.  The object of this joint venture is to supply Toyota with lithium-ion batteries through development of Orocobre’s flagship Salar de Olaroz Lithium-Potash Project in Argentina.

As part of the deal, Toyota will acquire a 25 percent equity interest in the joint venture at a cost based on pending estimates from feasibility studies.  Toyota will be responsible for securing a Japanese government-guaranteed low-cost debt facility for at least 60 percent of the Project's development costs.  This facility is expected to be secured through the Japan Oils, Gas and Metals National Corporation, a state-owned entity that provides assistance to Japanese companies in securing supplies of mineral resources.  Orocobre will continue to own 75 percent of the Project after construction, and will operate the joint venture.  This arrangement is mutually beneficial, because it both assures Toyota of a guaranteed source of long-term funding, and eliminates any need on Orocobre’s part to shoulder the burden of sourcing additional funds.

Latin America’s abundant lithium reserves make the region a highly attractive destination for international investment, and particularly for investors from China and other emerging markets where demand for lithium-based products are set to skyrocket.  The expansion of the Panama Canal, which will give rise to a class of supersized “New Panamax” vessels, will further strengthen this demand in the region.  Vast differences in language, culture, and legal systems, however, make such investments a challenging endeavor.  These investors must adopt a comprehensive global vision in order to adequately address these daunting challenges.  Potential investors should not be deterred from entering the Latin American market as a result of legal and logistical uncertainties.  In order to best capitalize on their investments in Latin America’s lithium resources, investors should retain legal counsel that not only understands the applicable laws, but has a keen awareness of the cultures and customs that have given rise to these laws.   This is the foundation for every successful joint venture.                                              

Xingjian Zhao is a multilingual attorney in Diaz, Reus & Targ, LLP’s Miami office, focusing on commercial litigation, regulatory compliance, cross-border transactions, and various areas of PRC law.  He can be reached at xzhao@diazreus.com. Marta Colomar Garcia is a multilingual attorney at Diaz Reus & Tar’s Miami office, focusing on commercial litigation. She is knowledgeable and experienced in international business transactions and international trade. She can be reached at mcolomar@diazreus.com.

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